More on the Centralised Retirement Proposition

February’s Howwow has been and gone covering the Centralised Retirement Proposition (CRP). If you missed it, you can watch the replay here.

Our panel of Tim Coverdale, Head of Business Development in the North of England for 7IM and Martin Lines, Business Development Director at Just not only stormed through as many questions in that hour as they could, they’ve also answered those we couldn’t squeeze in right here.

Leaving aside investment strategies, how do individual advisers/firms decide whether to adopt things like bucket strategies, natural income, rising equity glide path, guardrail strategies etc?

Tim: This is Step 1. in the process of building a “core” drawdown approach to sit within your CRP. It will require, time, patience, open’ish minds and probably external input if you are to arrive at something which ALL of your firm can get behind. In considering this issue, I’d suggest that you need to accept the following…

  • There is no perfect strategy
  • We all have a tendency to “anchor” to our existing beliefs
  • For an approach to be successful, it will need to strike a balance between; investment “science”, investor behavioural biases and what regulation/compliance will permit

My firm belief is that whatever you put in place should…

  • Have some “scientific” basis for believing it should generally deliver good and relatively consistent outcomes to your clients
  • Be appealing and comprehensible to clients
  • Be flexible enough to adapt to clients’ changing needs and market conditions
  • Be something that your business is genuinely capable of delivering in a consistent manner
  • Be sufficiently robust that it protects both your clients and your business

In determining what your firm’s overarching approach to drawdown should be, you will need to weigh up all the relative merits of each philosophy/strategy. However, you need to remember that everyone with whom you consult, internally or externally, will come to the debate with preconceived thinking.

7IM is no different in this respect, we strongly advocate a “bucketing approach”…however we have equally robust views as to how this should be implemented and managed. For us, the essential ingredients for an effective bucketing strategy are:

  • You need some method for managing/reducing Sequencing Risk
  • If you’re holding cash, you need to need to take steps to mitigate the potential investment drag
  • The strategy should be able to encompass various tax wrappers
  • You need to rebalance and top up cash on a “judicious” basis, not just when it suits your firm for practical purposes!
  • You need to revisit the plan at least every year, re-run the numbers and adjust it based upon how markets have performed and the client’s changing needs
  • You need to provide client friendly reporting which leaves the client in no doubt as to how things are progressing and help them make informed decision regarding whether they might need to adjust their spending

All of the above is possible, however, we still see many ill-conceived and poorly executed bucketing strategies. The 7IM Retirement Income Service incorporates all of the above. We’re happy to share our “science” and methodology with firms so they can assess whether 7IM RIS might fit within their CRP or alternatively choose to use our insight to build their own in-house version.

For a variety of reasons, we are not keen on most “Natural Income” strategies. We’ll happily discuss these with you, but a good starting point would be to google “The Free Dividend Fallacy”.

The Rising Equity Glidepath may indeed have potential to deliver enhanced outcomes, but there is a question mark over how acceptable it will be to clients and how comfortably it sits within current compliance thinking.

Guardrail strategies are also interesting but again, how easy are they to understand and to deliver?

Martin: I think that is one for firms to answer. Maybe, worth a survey(?) I think bucket strategies follow on from the early days of drawdown and could make sense in terms of short, medium and long-term strategies.

With natural income it would be a case of whether enough could actually be produced to meet the income need. Also, is the client happy that the income could potentially fluctuate regularly? I suspect with those, there may be other sources of income available to supplement the natural income. Is the purpose to keep the initial fund fully intact? Does that fit with a legacy objective? It comes down to what the client needs.

As far as a CRP is concerned, I think that there needs to be some consistency around what the firm’s philosophy is and how they evidence the strategy to the client. Does it respond to meeting the capacity for loss and spending hierarchy?

A lot of chat is about pension income. How do other firms’ CRPs incorporate other tax wrappers?

Tim: The first point to make is that CRPs should definitely incorporate other tax wrappers. This is not too difficult to do, however, on the basis that it is usually desirable to house a CRP on a platform, off-platform products such as “older” life company investment bonds etc can make the process more complicated…particularly in terms of provided consolidated reporting.

One of the key things to consider within you drawdown CRP, is should you have a “default depletion strategy” for the various wrappers eg. OEICs, followed by ISAs, followed by Pensions…though you would of course have flexibility to deviate from this to meet individual client’s objectives.

Martin: It is important that all assets are taken into account, perhaps as part of a withdrawal policy. This should not only show what the agreement is in the future if things don’t go to plan (for example do we cap escalation in certain circumstances or start using alternative assets if others need to recover).

It should also detail the plan and order of withdrawing benefits, perhaps in the most tax efficient manner. For example, it may be better to use CGT, savings allowances, dividends in the right order to maximise allowances and, in some circumstances keep the pension invested.

The theories in terms of a sustainable income from capital markets will be broadly similar, but clearly the nature of the wrapper, charges, tax etc. should be factored in. A cash-flow tool may help with this. Is it also worth considering other assets, e.g. housing equity and the impact this may have?

This is fine for individuals but what about group scheme members, particularly with Auto Enrolment.

Tim: I see no reason why a CRP cannot be extended to serve the needs of GPP members. There may be a question of are they willing to pay for the advice, and/or do they have sufficient assets to justify the cost of the advice…might the employer be willing to contribute something?

In theory, the more streamlined you CRP becomes, the easier it should be for your firm to deliver and therefore there may be potential to for lower fees to be charged…

If your firm is heavily involved with such schemes, as well as full advice, is there potential to offer a triage service which provides basic information to help members filter themselves out from Drawdown and gets them to focus upon annuities? If they’re determined to opt for drawdown, then perhaps this triage would point them toward the “non-advised” Investment Pathways that will be on offer.

Martin: I think this is what investment pathways are in part to try and help tackle, depending on the end objective.

Even in an auto-enrolment though, the individual still needs to decide what is best for them, rather than anyone else in the scheme, so the principle is the same. Perhaps it is more of a question of access to advice, particularly if fund sizes are relatively small.

What’s a good way to deal with clients who favour FAD but have demonstrated that they’re not particularly good at sticking to budgets and are prone to being financially very impulsive?

Tim: One could argue that if you can’t do a DB Transfer without receiving regulated advice, the same should be true for entering for FAD. It’s difficult enough for highly qualified advisers and paraplanners to design a robust drawdown plan…the vast majority of individuals have almost zero chance.

One of the reasons that your CRP needs to be so robust, not just in relation to initial advice, but with regards to the ongoing relationship is that some plans will “fail”, perhaps because markets go haywire (though a good strategy might withstand this) but more likely because for whatever reason the client decides to go off-script.

At the annual review, the adviser needs to re-run the numbers, re-ascertain whether the client is still suited to drawdown and if not be prepared to recommend another course of action.

Martin: Safety-first could be a sensible option here! I think it may take more focus on the essential income conversation and helping the person ‘slow down’ their thinking.

Some brief pointers that may be worth specific emphasis : Attitude to risk, Emotional tolerance for loss, Investor experience, Financial competency, assessment of financial capacity to absorb loss relevant to needs. Certainly, it may be a case of more regular reviews and a robust withdrawal policy statement.

How do you deal with situation where client wants to take £X out of pension but you don’t believe that would be ‘suitable’? Do you advice no and then process on insistent client basis or do you educate client to adjust expectations/objectives and then advise?

Tim: The first thing to do is to provide the client with a report/proposal that graphically explains the likelihood of their chosen withdrawal rate being “achievable” over the long term. Something that is sooooo clear that no-one could really argue that they didn’t understand the risk they were taking.

Even then, although I am not an adviser, I would hesitate from taking on an “insistent client” of this nature…if they won’t listen to your advice I cannot see how you can add value nor fancy the chances of you enjoying a long term relationship…it’s almost certainly going to end badly!

Martin: I think the first place is to look at the objectives and discuss saving more, retiring later or retiring on less. The work we did with Rory Percival would suggest that taking more risk than the client’s normal ATR is a last resort, and should probably be avoided. I think the answer here is similar in some ways to the ‘impulsive’ client answer.

Would a POA help clients in FAD when their cognitive ability declines?

Tim: Yep!

Martin:Yes. A lot of advisers talk about this as early as possible. If amendments have to be made and the client cannot make the necessary decisions about withdrawal amounts, investment options etc., that could cause a serious issue and delays where the Court of Protection is only involved at the time when a transaction needs to take place.

Links and Resources

Just – Work with biases to create better retirement outcome 

Just – Behaviour Finance – How are your clients behaving?

7IM – Retirement Income Service

7IM – Predictably Unpredictable Futures – A guide to our retirement planning service: What it is and how we can help you